A SBU is a business within a firm that requires its own strategy. An SBU has three characteristics:
(1) It is a single business or collection of related businesses that can be planned separately from the rest of the company;
(2) it has its own set of competitors; and
(3) it has a manager responsible for strategic planning and profit performance who controls most of the factors affecting profit.
The main reason for identifying the company’s strategic business units is to formulate different strategies and assign appropriate funding to the entire business portfolio. This is important since SBUs have different varying profit potential. Managers therefore apply different model to allocate resources among the existing SBUs. One of the best-known business portfolio evaluation models is the Boston Consulting Group Model described in what is known as growth share matrix.
Boston Consulting Group Model
The growth-share matrix is divided into four cells, each indicating a different type of business:
➤ Question marks are businesses that operate in high-growth markets but have low relative market shares. Most businesses start off as question marks as the company tries to enter a high growth market in which there is already a market leader. A question mark requires a lot of cash because the company is spending money on plant, equipment, and personnel. The term question mark is appropriate because the company has to think hard about whether to keep pouring money into this business.
➤ Stars are market leaders in a high-growth market. A star was once a question mark, but it does not necessarily produce positive cash flow; the company must still spend to keep up with the high market growth and fight off competition.
➤ Cash cows are former stars with the largest relative market share in a slow-growth market. A cash cow produces a lot of cash for the company (due to economies of scale and higher profit margins), paying the company’s bills and supporting its other businesses.
➤ Dogs are businesses with weak market shares in low-growth markets; typically, these generate low profits or even losses. Successful SBUs move through a life cycle, starting as question marks and becoming stars, then cash cows, and finally dogs. Given this life-cycle movement, companies should be aware not only of their SBUs’ current positions in the growth share matrix, but also of their moving positions. If an SBU’s expected future trajectory is not
satisfactory, the corporation will need to work out a new strategy to improve the likely trajectory.
An unbalanced portfolio would have too many dogs or question marks or too few stars and sources of income.
Strategies of Allocating resources to SBUs
After identifying the various position of each SBU, the next task is to determine what objective, strategy, and budget to assign to each SBU. This can be done using the following four strategies.
1. Build: The objective here is to increase market share, even forgoing short-term earnings to achieve this objective if necessary. Building is appropriate for question marks whose market shares must grow if they are to become stars.
2. Hold: The objective in a hold strategy is to preserve market share, an appropriate strategy for strong cash cows if they are to continue yielding a large positive cash flow.
3. Harvest: The objective here is to increase short-term cash flow regardless of long-term effect. Harvesting involves a decision to withdraw from a business by implementing a program of continuous cost retrenchment. The hope is to reduce costs faster than any potential drop in sales, thus boosting cash flow. This strategy is appropriate for weak cash cows whose future is dim and from which more cash flow is needed. Harvesting can also be used with question marks and dogs.
4. Divest: The objective is to sell or liquidate the business because the resources can be better used elsewhere. This is appropriate for dogs and question marks that are dragging down company profits.